Merkel set to win Spanish aid vote despite rebels

BERLIN (Reuters) - Chancellor Angela Merkel's authority within her centre-right coalition was at stake on Thursday as uneasy German lawmakers prepared to vote on Berlin's contribution to a euro zone aid package for Spain's ailing banks.

Merkel can count on broad centre-left opposition support to push the decision through the Bundestag, the lower house of parliament, whose members were recalled to rainy Berlin from their summer recess especially for this one-day session.

But with each vote on the euro zone's debt crisis, concern about the rising costs to Germany has hardened, prompting a growing number of coalition lawmakers to rebel and cramping the government's room for maneuver in European negotiations.

Finance Minister Wolfgang Schaeuble, who opened the parliamentary debate ahead of the vote, expected around 1500 GMT, said the slightest perceived risk of Spanish insolvency could trip up the entire 17-nation euro zone.

"Therefore any problems in the Spanish banking sector are a problem for the financial stability of the euro zone," he said.

Merkel only needs a simple majority in this vote - something she looks certain to achieve - but she would prefer not to rely on opposition votes for such an important decision.

The chancellor, whose tough stance on the euro crisis has boosted her popularity ahead of next year's federal election, has said she is not aiming in the vote for a symbolically important "chancellor majority", which would require the support of 311 of her coalition's 330 MPs in the 620-seat Bundestag.

She fell short of that majority at a more far-reaching legislative vote last month on the permanent rescue scheme, the European Stability Mechanism (ESM), with 26 coalition "no" votes but may come close this time, though five coalition MPs will likely miss the vote.

Frank Schaeffler, a backbencher from the Free Democrats who has been particularly outspoken against Germany's crisis policies, said Spain only had one systemically important bank and the euro zone should not bail out Madrid's financial sector.

"It's a black hole that will soak up taxpayers' money without limits," he told Westdeutsche Allgemeine Zeitung.

Spain applied for a euro zone bailout late last month as the state of its banking sector, laden with bad debts, deteriorated rapidly. On Thursday, Bankinter posted first half net profit down more than 77 percent and said it had written down 275.2 million euros against deteriorating real estate assets.

The Spanish government had to offer a euro lifetime record interest rate on Thursday to sell five-year bonds, highlighting Madrid's precarious position and pushing 10-year bond yields back above the 7 percent level seen as unsustainable in the long term.

Germany, Europe's largest economy, will guarantee almost 30 percent of the new euro zone aid package, whose total value may reach up to 100 billion euros ($123 billion).

CATASTROPHIC DAMAGE

The result of the vote was largely a foregone conclusion after the main opposition parties signaled they would vote in favor because keeping Spain from needing a full-scale sovereign bailout was in Germany's interest.

However Frank-Walter Steinmeier, parliamentary floor leader of the Social Democrats, said the opposition would not allow direct recapitalization of banks by the euro zone's rescue fund, which some lawmakers worry would be the next step.

"I don't want to conceal that many in my parliamentary group are not at all convinced we are doing the right thing," Steinmeier said ahead of the vote. "If the majority of us still vote in favor, this is only because in our view too the damage would be catastrophic if Germany denied aid to Spain.

"That also means however that it cannot go on like this. There will be no direct path from the Spanish aid to permanent recapitalization of banks, at least not with us," he said.

Some lawmakers are concerned that Spanish banks, not the Spanish state, would be liable for the funds once it is transferred to the ESM from the current temporary bailout fund, increasing risks for German and other euro zone taxpayers.

Under the temporary European Financial Stability Facility (EFSF) rescue fund, the vehicle initially used for Spanish aid, the Spanish state will be liable.

The same is true for the ESM, which will take over once it is operational, but that fund is earmarked for major changes, which could eventually see it recapitalizing banks directly, but Schaeuble said the Bundestag would need to vote on such changes before they could take effect.

Schaeuble needs parliamentary approval before he can commit Germany to the Spanish bailout in a conference call of euro zone finance ministers set for Friday.

Merkel is under heavy pressure from some EU partners to move more quickly to stem the crisis but must also heed limits set by German public opinion, parliament and the Constitutional Court, which has told the government to give lawmakers more say.

The court has delayed the entry into force of the ESM, the permanent rescue fund, pending a detailed legal review of whether it violates the German constitution. The court is due to deliver its verdict only on September 12.